Posts Tagged ‘David Ricardo’
Free trade fallacies

Grosse Arbeitslosigkeit auch in England ! Im Monat Juli wurden in England über 2 Millionen Arbeitslose gezählt. Es ist eine Ziffer, wie sie England noch nicht aufzuweisen hatte. Arbeitslose vor dem Gewerkschaftshaus in London auf Arbeit wartend.

Steve Kates explains why Trump’s attitude to trade may conform to Ricardo’s theory of comparative advantage:

The free trade argument concludes that nations jointly maximize their levels of consumption to their mutual benefit when firms within the nations are allowed to engage in trade unhindered by arbitrary interventions by government especially those intended to shield some industries from foreign competition. Hindering such trade through the imposition of tariffs or quotas is called protectionism. His principle and approach have been the basis for subsequent expansion and development of the free trade idea, and are still taught in principles textbooks.

This is true enough but it is built on a foundation which no longer holds:

The major prerequisite for the benefits of free trade to hold: it is assumed that capital and labor stay within each country. They are reallocated within a country, but not between them. That means that outsourcing of, say labor, is not an example illustrating free trade nor are those who object to outsourcing promoting protectionism. In short, maintaining the Ricardian prerequisite is not anti-free trade.

The key concept which drives this conclusion is the distinction between comparative and absolute cost advantages. A country may be able in absolute cost terms to produce something more cheaply than its trading partner (using fewer workers, for example). However, it still may find it advantageous to let its trading partner produce this good, if its own alternative uses of (labor) resources allows it to be still more productive. Subsequent trade between the two countries will be to their mutual benefit. The essence of the free trade principle then is comparative not absolute advantage. Yet when corporations scan the globe for the cheapest labor to move their factories to or hire their services from, they are looking for absolute not comparative advantage–a situation that goes beyond the bounds of the free trade principle. It is not a tenet of free market economics that losing one’s productive assets is beneficial for the nation, however much it may benefit a particular corporation. Current US experience makes the point very clear: the middle class continues to shrink while paupers and billionaires continue to grow. This is not the hallmark of a healthy economy.

Armed with this distinction we are liberated to adjust policy (within limits) without losing our economic integrity to free markets. We can, for instance, admit that there are situations where a complete free trade or laissez-faire approach is unwise. These are situations not considered in the Ricardian analysis but which subsequent work has shown complicate the picture of benefits and costs arising from international trade and which do call for prudent policy interventions.

Ideologues have thrown the free trade baby benefits out with the bathwater.

The coalition signed up to the Trans Pacific Partnership. If anything marks them as unfit to govern, that does.

Too many economists, public servants and politicians have substituted mouthing slogans and repeating received notions, for thinking. Sometimes a little bit of knowledge is a dangerous thing. It creates fertile ground for the growth of the Dunning-Kruger Effect:

Incompetent people are significantly less able to recognise their own lack of skill, the extent of their inadequacy, and even to gauge the skill of others. Furthermore, they are only able to acknowledge their own incompetence after they have been exposed to training in that skill.

Dunning-Kruger Effect is running out of control. It appears to be particularly widespread among those who should know better. This may be an  unforeseen consequences of the rampant expansion of the university sector. It has not just wasted time and money, but has actually undermined the competence of those exposed to it.

Our governing class may not be too dumb for their own good. But they certainly are for ours. Over educated group thinking mouthpieces. Lacking in the breadth of experience necessary to spot BS when we are up to our necks in it. They are fine, floating along on their perks and privilege. Complaining of the stink from those they deem beneath them. Blissfully unaware of the sewer they are turning society into.